N AT I O N A L C E N T E R F O R P O L I C Y A N A LY S I S

The Housing Crash and Smart Growth
Policy Report No. 335

by Wendell Cox

June 2011

There is general agreement the financial crisis that began with the failure ofLehman Brothers on September 15, 2008, was worsened by the bursting of the U.S.
housing price bubble. It is also generally acknowledged that some of the fuel for the
housing bubble came from a relaxation of mortgage loan standards that allowed
many families to purchase homes they could not afford with loans on which they
subsequently defaulted.

Executive Summary
There is general agreement the financial crisis that began with the
failure of Lehman Brothers on September 15, 2008, was worsenedby the bursting of the U.S. housing price bubble. It is also generally
acknowledged that some of the fuel for the housing bubble came froma relaxation of mortgage loan standards that allowed many families
to purchase homes they could not afford with loans on which they
subsequently defaulted. New and excessive demand from mortgagees
drove up home prices faster than the increase in the housing supply.
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It is less well understood that the U.S. housing bubble was not amonolithic event. It varied substantially by geography. Gross national
house value increases and losses were overwhelmingly concentrated
in metropolitan areas with more restrictive land use regulations —known by a variety of names, such as compact city policy, growth
management or smart growth. Many metropolitan areas with these land
use restrictions were not able to respond to the increased demand forhomeownership caused by the greater availability of mortgage credit.
The inevitable result was higher prices, which encouraged speculationand increased house prices even more. Thus, from 2000 to 2007,
among the nation’s 50 largest metropolitan markets:■■ In the 10 markets with the greatest rise in prices compared toincome, the cost of a house rose by an average of $275,000,
relative to incomes.
■■ Among the second 10 markets with the greatest price escalation,
house prices rose $135,000.
■■ By contrast, in the major markets with the least rise in prices,
houses increased only $5,000.

The Housing Crash and Smart Growth
Furthermore, from 2000 to 2007, the gross valueof the U.S. housing stock rose $5.3 trillion relative tohousehold incomes. It is estimated that $4.4 trillion ofthis increase occurred in the 20 major markets withthe greatest escalation in housing prices.
For the nation as a whole, house values more thandoubled from 1999 to the peak of the bubble. Fromthe peak in the fourth quarter of 2006 until the end of
2010, homes values fell more than $6 trillion. Losses
after the bubble burst were even more concentrated
than house price gains. Consider:■■ From the peak of the bubble in 2006 to theLehman Brothers’ collapse on September 15,
2008, more heavily regulated metropolitan
markets accounted for 73 percent of aggregate
value losses.
■■ The average loss from 2007 to the Lehman
Brothers’ collapse was $175,000 per house in the
11 markets with the greatest run-up in prices andthe greatest fall.
■■ All prescriptively regulated markets (more heavily
regulated markets) accounted for 94 percent oflosses, or an average of $97,000 per house.

■■ Responsively regulated markets (less restrictively
regulated markets) lost just 6 percent of theirvalue, or an average of $12,000 per house.
With prices falling and mortgage interest rates
rising, households were no longer able to refinance,
causing many new homeowners to fall intodelinquency and foreclosure.
If the prescriptively regulated metropolitan areas
had instead had responsive land use regulations, prices
likely would have escalated at a much lower rateduring the housing bubble. This is because the land
price premiums that grew during the bubble would
have been less likely to develop, at least to the same
degree. If the housing markets in the prescriptively
regulated markets had replicated the performance ofthe responsive markets, it is estimated that the house
value losses from the peak of the bubble to the startof the financial crisis would have been $0.62 trillion,
one-fourth of the actual loss of $2.44 trillion. The
average loss per house would have been $17,000
instead of $67,000. These more modest losses might
not have set off the financial crisis, or it might havebeen less severe.

About the Author
Wendell Cox, principal of the Wendell Cox Consultancy in metropolitan St. Louis,
Missouri, is an adjunct scholar with the National Center for Policy Analysis, a senior
fellow with the Heartland Institute and a visiting fellow in the Thomas A. Roe Institutefor Economic Policy Studies at The Heritage Foundation. He was appointed to threeterms on the Los Angeles County Transportation Commission by Mayor Tom Bradley
and was appointed by Speaker of the House Newt Gingrich to the Amtrak Reform
Council, to complete the unexpired term of New Jersey Governor Christine Todd
Whitman. He is a visiting professor at the Conservatoire National des Arts et Metiers, anational university in France.
Mr. Cox holds a bachelor of arts degree in government from California State University,
Los Angeles and a master of business administration degree from Pepperdine University.

2Introduction
There is general agreement thefinancial crisis that began withthe failure of Lehman Brothers on
September 15, 2008, was worsenedby the bursting of the U.S. housing
price bubble. It is also generally
acknowledged that some of thefuel for the housing bubble camefrom a relaxation of mortgage loan
standards that allowed many families
to purchase homes they could notafford with loans on which they
subsequently defaulted. New andexcessive demand from mortgagees
drove up home prices faster than theincrease in the housing supply.
After the run-up from 1999 to
2006, house prices began fallingand mortgage interest rates began
rising. Households were no longer
able to refinance, causing many new
homeowners to fall into delinquency
and foreclosure. Lenders begancalling these mortgages “toxic”
assets because they yielded no
return. Institutions holding theloans resisted revaluating theirassets because doing so would force
them to admit their insolvency.
But with no other institutions topurchase these loans, the market
froze, causing mounting losses that
could not be absorbed by lenders.
Bear Stearns, one of the firms thatcollapsed, announced in July 2007
that its subprime hedge fund had
lost nearly all of its value, causing
a 61 percent drop in overall net
profits and forcing a merger with
J.P. Morgan Chase eight months
later. Lehman Brothers, a rival
investment bank, similarly filed
for bankruptcy in late 2008, citingbank and bond debt of $768 billion
with assets worth $639 billion. The
bankruptcy of these firms led to thewell known collapse of the U.S.
mortgage finance industry generally.
It is less well understood that
the U.S. housing bubble was not
uniform across the country. It
varied substantially by geography,
largely mirroring differences in thestringency of land use regulation.
The crash in house values that
followed was also concentrated
in the markets with the mostrestrictive land use policies.

suburbs on the fringe of urban
areas, such as Levittown, New
York. As average (median) family
incomes rose in the post-war era,homeownership grew significantly.
Consider:■■ Homeownership rose from 44
percent of households in 1940 to
62 percent by 1960.
■■ Sixty-five percent of households
were homeowners in 1995.
■■ Homeownership peaked in 2006
at 69 percent.
House sizes also increased: 1“The housing price bubble
was concentrated inInsertcallout
here.
areas withrestrictive
land use policies.”

The Housing Bubble
The U.S. housing bubble thatdeveloped from 1999 to 2006 was
the result of actions by both potential
homeowners and lenders. Potential
buyers perceived homeownershipas an investment that had little
risk. Economic incentives offeredto lending institutions resulted in
the issuing of subprime loans withvariable interest rates to householdswith poor (or no) credit histories.
Increased demand for homes raised
prices and, as a result, the supply
increased: more new homes werebuilt and more existing homes wereput on the market.
The American Dream ofHomeownership. Following WorldWar II, Americans began to realize
the dream of home ownership withthe development of low-priced■■ In 1973, the average singlefamily home was 1,525 squarefeet.
■■ By 2006, the average home sizerose to 2,248 square feet, an
increase of 47 percent.
The quality of housing also
increased, with amenities like air
conditioning becoming standard
features in new homes.
House Prices and Income:
The Multiple Median. From thelate 1940s until 1970, there was ageneral equilibrium between house
prices and household incomes in the
United States: The median sale priceof detached housing was generally
less than or equal to three times
the median household income in aparticular home market, a measure
called the median multiple. As the
housing bubble began to develop,
house prices and the value of existinghouses began to rise faster thanincomes. For example:2■■ The sales price of the mediansingle-family home more thandoubled from $104,500 in 1987
to nearly $241,000 at the peak of
housing prices in 2006.
3

The Housing Crash and Smart Growth

Figure I

Market Value of U.S. Homes, 1999-2010*(trillions of dollars)

$4.35

24

■■ Among the second 10 markets
with the greatest priceescalation, house prices rose
$135,000.

22

20

80%

18

5.52%

16
14

68%

62%

$1.45

3.59%

6.37%

6.21%

5.94%

50%

12
10
8

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

*Note: All types of owner-occupied housing, including farm houses and mobile homes, unrented second homes, vacant homes for sale and vacant land.
Source: Federal Reserve Board, “Flow of Funds Report.”■■ The gross value of the U.S.
housing stock rose $5.3 trillion
more than household incomesfrom 2000 to 2007.
■■ In fact, the value of existinghouses more than doubled inless than eight years, rising from
$10.4 trillion in 1999 to a peakof $22.7 trillion in 2006.3 [SeeFigure I.]
Geography of the Housing
Bubble. In 2005, economist Paul
Krugman, a New York Times
columnist and Nobel Laureate,
pointed out that the rise in house
prices was not uniform across thenation. House prices rose much moreon the East and West coasts than in
the middle of the country:4■■ From the first quarter of 2000 to
the first quarter of 2005, average
housing prices nationwide roseabout 50 percent.
4■■ In the 10 markets with thegreatest rise in prices compared
to income, the cost of a houserose by an average of $275,000,
relative to incomes.

■■ Over this period, house pricesrose less than the national
average in responsively
regulated (less restrictively
regulated) metropolitan areas
like Houston and Atlanta, where
prices rose 26 percent and 29
percent, respectively.
■■ However, house pricesrose much higher than
average in more heavily (or“prescriptively”) regulated
metropolitan areas like New
York, Miami and San Diego —by 77 percent, 96 percent and
118 percent, respectively.
As Krugman noted, the increasein house prices was concentrated inparticular markets. This has been
confirmed by more recent figures
since the market downturn. From2000 to 2007, among the nation’s 50
largest metropolitan markets:■■ By contrast, in the major
markets with the least rise in
prices, houses increased only
$5,000.
Furthermore, from 2000 to 2007,
the gross value of the U.S. housing
stock rose $5.3 trillion relative tohousehold incomes. It is estimatedthat $4.4 trillion of this increase
occurred in the 20 major markets
with the greatest escalation in housing
prices.
Mortgage Debt. To purchasehouses at higher prices, Americans
took on more mortgage debt over thisperiod:■■ From 2000 to 2007, thevalue of gross residential
mortgages in the UnitedStates rose $4.8 trillion morethan household incomes.
■■ Assuming that the distributionof mortgages tracked escalating
prices, 83 percent of the risein house values occurredin the 20 markets with thegreatest escalation in housing
costs relative to income.
■■ However, these markets
account for only 26 percent of
the nation’s owner-occupied
housing stock.
These numbers suggest that more
liberal lending policies were not thesole cause of the housing bubble andsubsequent bust.

The Cost of Excessive
Land Use Regulation
What accounts for the geographic
concentration of the bubble inhouse prices and subsequent crash?
Numerous studies have found an
association between land use policies
and house prices. Scarcity tends
to raise prices (other things being
equal). However, natural limits on
the availability of land, such as thepresence of a seacoast or mountains,is secondary to the scarcity caused byregulatory barriers that stand between
the natural barriers and urbanization.5
A reduction of land available forhousing due to regulatory restrictions
can increase house prices. Land
prices, not construction costs,
account for the largest differencesin median house prices among
metropolitan areas. Areas withless restrictive policies have lower
housing prices. For example, while
the nine largest metropolises withprescriptive regulation in the nation
averaged a median house price of$417,800 before the crash, housesin the less regulated Houston,Atlanta and Dallas-Fort Worthmarkets averaged $159,300.6
Research by Edward Glaeser andJoseph Gyourko has shown a strong
relationship between prescriptive
land use policies and higher housing
prices.7 Other distinguished academics have come to similar conclusions.8
A Typology of Land Use Policies. A Brookings Institution study
divides local and state land use
regulations into four broad families
by county. These classifications are
the foundation of the typology usedin this report, which divides land use
regulation into “prescriptive” and“responsive.”

Prescriptive land use regulation
markets include those classified
as “growth management,”“growth control,” “containment”
and “containment-light” in the
Brookings study, as well as markets
Demographia has determined
to have significant rural zoning(large lot zoning) and substantial
geographical development
prohibitions (New York, Chicago,
Milwaukee, Minneapolis-St. Paul,
Virginia Beach and Washington).9
All other markets are classified
as responsive land use regulation
markets (development is allowed tooccur based upon market preferences
consistent with fundamental
environmental regulation.)“The supply of housing
wasnot ableto risehere.
to meetInsertcallout
the increased demand.”Prescriptive land use policies
are designed to stop or contain thegeographic expansion of urban
areas — also called suburbanizationor, pejoratively, urban sprawl — andforce more travel by public transit
and walking, instead of by car. These
policies are assigned various labels
such as compact city policy, growth
management and smart growth.10
Principal smart growth policies
include urban containment (such as
growth boundaries and restrictions
on physically developable land),large-lot zoning in urban fringe andrural areas, state aid contingent on
local growth zones, house building

moratoria or limits, high development
fees and exactions, and mandatory
regional or county planning.11
Creating an Index of Regulatory
Costs. Generally, land and regulatory
costs are 25 percent of the net cost of
constructing a house, after subtracting
the cost of infrastructure (streets,water and sewer lines) for a site. Thismeans that, in a metropolitan region
with normal land and regulation
costs, the cost of the house will be 80
percent of the total price, while thecost of the land and regulation will be
20 percent.
The “2010 Demographia
Residential Land Use & Regulation
Cost Index” compares estimated land
and regulatory costs for new entry
level houses in 11 representative
metropolitan regions selected
for geographical and regulatory
balance, and because there wassufficient data available fromwhich to develop the index. The
11 markets are Atlanta, Dallas-Fort
Worth, Houston, Indianapolis,
Minneapolis-St. Paul, Portland,
Raleigh-Durham, San Diego, Seattle,
St. Louis and Washington-Baltimore.
As Figure II and Table I show,
land and infrastructure costs for six ofthe metropolitan markets are within
historic norms (Atlanta, Dallas-Fort
Worth, Houston, Indianapolis,
Raleigh-Durham and St. Louis). Eachof these markets has less restrictive
land use regulations.
The other five metropolitan areas(Minneapolis-St. Paul, Portland,
San Diego, Seattle and WashingtonBaltimore) have more restrictive land
use regulations. Nonconstruction
costs in these markets jumped two
to 13 times the historic norm, adding
from nearly $30,000 (Minneapolis5

The Housing Crash and Smart Growth

Figure II

Land & Regulation Cost Index: New 2,150 Square Foot Detached House*$239,100

Less Restrictive

More Restrictive$90,700$69,400$76,200$48,700$13,200
Houston$13,900$14,500

Indianapolis

Dallas -Fort
Worth$16,000

Raleigh Durham$16,100

Atlanta$16,900

St. Louis

Minneapolis-St. Paul

SeattlePortlandWashington-Baltimore

San Diego*Note: Represents gross actual land and regulation cost.
Source: Demographia Land & Regulation Cost Index: New 2,150 Square Foot Detached House, Table 2. Available at http://
www.demographia.com/dri-full.pdf.

St. Paul) to more than $220,000(San Diego) to the price of a new
home.12 [See Figure II and Table I.]
The Index numbers are calculatedby dividing the estimated land andregulatory cost in a metropolitan
region by this “normal” cost.
Conservatively, the index assumes
that any house price above 125
percent of its construction cost is due
to excess land and regulation costs.
Thus, the index illustrates the extent
to which more restrictive regulation
in metropolitan areas add to the costof new housing.
Loss of Housing Affordability in
Prescriptively Regulated Markets.
The broad, stable ratio of housing
prices to rising incomes during thepost-World War II era began to break
down in the 1970s in certain states.
6

For example, Hawaii and California imposed real estate regulations in
the 1960s, followed in the 1970s byOregon and Vermont. William Fischelof Dartmouth University foundhousing price increases in California
were associated with the stronger
regulations adopted after 1970.13
Oregon adopted urban growthboundaries in the mid-1970s. Urban
growth boundaries allow higher
density development within theboundary area and restrict residential
development outside the boundary.
As development expanded within theurban growth boundary of Oregon’slargest metropolitan area, Portland,house prices rose substantially. The
area experienced the greatest loss inhousing affordability in the nation
during the 1990s.14 Other states, suchas Florida and Washington, and manyother metropolitan areas also adopted
prescriptive land use regulations.
Housing affordability, as measured
by the median multiple, deteriorated
markedly in the prescriptively
regulated markets, while generally
remaining within the historic norm of
3.0 in responsively regulated markets[see Figure III].
Environmental Issues andSmart Growth. Land use in areas
with market-responsive policies
is regulated by basic federal, stateand local environmental regulations
and statutes (such as the Clean
Water Act). Proponents of more
restrictive policies, however, appeal
to environmental concerns about
inefficient land use, reliance on
automobiles, preservation of farmland
and attempts to restore inner cities tomore livable conditions. In fact, less

than 3 percent of the nation
TABLE Iis urbanized, and far more
Demographia Land & Regulation Cost Index
land has been taken out ofagricultural production than
Expected Raw
Gross Actual
has been converted to urban
Land &
Land &
Excess Land &use.
Metropolitan Market
Regulation Cost Regulation Cost
Regulation Cost
More recently,
Traditional
proponents have seized$0
Atlanta$16,100$ 16,100
upon unease about$0
Indianapolis$13,900$ 13,900
greenhouse gas emissions$
0
Raleigh-Durham$16,000$
16,000to advance smart growth$0
St. Louis$16,900$ 16,900
policies, based on theassumption that denser
Texas
housing will materially$0
Dallas-Fort Worth$14,500$ 14,500
reduce automobile use and$0
Houston$13,200$ 13,200
thus reduce greenhouse
Exclusionary
gas emissions. [See the$ 28,700
Minneapolis-St. Paul
$20,000$ 48,700
sidebar, “The Smart
Growth Greenhouse Gas
ReformEmissions Dead-End.”]$ 51,400
Seattle$18,000$ 69,400$ 59,300
Portland$16,900$ 76,200
House Values in$ 74,700
Washington-Baltimore$16,000$ 90,700
Prescriptive and$221,000San Diego$18,100$239,100
Responsive Markets.
As the housing bubble
Source: New 2,150 Square Food Detached House, Table 2. Available at http://www.demographia.com/dri-full.pdf
developed, prescriptively
regulated markets,
including those in
prices likely would have escalated
metropolitan markets accounted
non-major metropolitan markets,at a much lower rate during thefor 73 percent of aggregate
accounted for 89 percent of the
housing bubble. This is because thevalue losses.
aggregate increase in houseland price premiums that grew during■■ The average loss from 2007 tovalues. Conversely, 25 percent of
the bubble would have been lessthe Lehman Brothers’ collapse
homeowners lived in the responsively
likely to develop, at least to the samewas $175,000 per house in theregulated major markets, which
11 markets with the greatest run- degree. If the housing markets in theaccounted for just 11 percent ofprescriptively regulated markets had
up in prices and the greatest fall.
the aggregate value increases [seereplicated the performance of the
Appendix Table A, Section 1].
■■ All prescriptively regulated
responsive markets, it is estimatedmarkets
accounted
for94that the house value losses from
Concentrated Losses. From thepercentoflosses,oranaveragethe peak of the bubble to the startpeak in the fourth quarter of 2006
of $97,000 per house.
of the financial crisis would have
until the end of 2010, homes values
16
been $0.62 trillion, one-fourth offell more than $6 trillion. Losses■■ Responsively regulated markets
the actual loss of $2.44 trillion. The
after the bubble burst were even more
lost just 6 percent of their value,
average loss per house would haveconcentrated than house price gains.
or an average of $12,000 per
been $17,000 instead of $67,000.
Consider:house. [See Appendix Table A,[see Appendix Table A, Section 3].
Section 2.]■■ From the peak of the bubble in2006 to the Lehman Brothers’
collapse on September 15, 2008,
more restrictively regulated

If the prescriptively regulated
metropolitan areas had instead had
responsive land use regulations,Markets Most Affected by
Bubble. Over the period 2000 to
2007, the largest house value in7

The Housing Crash and Smart Growth

Figure III

Housing Affordability
Since 1950
Housing
Affordability Since
1950
Major
Metropolitan
Areas:MedianMultiple
MAJOR METROPOLITAN AREAS: MEDIAN MULTIPLE
10

Less Restrictive Markets
More Restrictive Markets: Not California
More Restrictive Markets: California

9Median Multiple

81950 – 1970: From Census Bureau
1980-2008: From Harvard University
2009: From Demographia
Annual Data Begins at 1980

7
6

5
4
3
2
1

 Median Multiple: Median House Price divided by Median Household Income

0
1950

1960

1970

1980 1985 1990 1995 2000 2005

Source: Census Bureau, Harvard University and Demographia.

creases were concentrated in 11 major
markets: Los Angeles, San Francisco,
San Diego, San Jose, Riverside-San
Bernardino, Sacramento, Las Vegas,
Phoenix, Miami, Tampa-St. Petersburg and Washington, D.C.17 These
markets are so heavily regulated thateven with the expansion of demand
induced by loose credit, the housing
market was not able to respond witha supply of new affordable housing
and there was a rush to purchaseexisting stock, which drove prices up.
■■ These markets accounted for
56 percent of the increasein aggregate house values
nationwide, although they
have only 28 percent of
homeowners.18■■ Average house values in thesemarkets dropped 25 percent
from the peak in 2006 to the
September 15, 2008, bust.
Subsequent Losses. After the
September 15, 2008, crash, housing
8

demand fell sharply and house
price losses accelerated acrossthe country, in both prescriptive
and responsive markets:■■ Approximately 44 percent of
the losses from the September
15, 2008, crash to the end of
the first quarter of 2009 werein highly regulated major
metropolitan markets.
■■ The prescriptive markets as awhole accounted for 82 percentof the losses.
■■ The responsive markets
accounted for just 18 percent.19
There is general agreement that
the U.S. housing bubble contributed
to the current financial crisis, which
has been the most severe since theGreat Depression. The crisis quickly
spread internationally, due to the sizeof the American economy and theintensity of the mortgage losses. If
the prescriptively regulated housing

markets in the United States had notbeen constrained by excessive land
use regulation, mortgage losses would
likely have been more manageable,
and the financial crisis might havebeen less severe.
Housing Still Expensive in
Prescriptive Markets. Even after
the decline in prices, housing remains
considerably more expensive thanhistoric norms in a number ofprescriptive metropolitan areas, suchas San Francisco, San Diego, Los
Angeles, New York, Boston, Portland
and Seattle. For example, compare
housing costs in San Diego, which
is highly regulated, to Dallas-Fort
Worth, which is less regulated:■■ As of the first quarter of 2010,
the median house price in San
Diego was about $380,000
and in Dallas-Fort Worthapproximately $140,000 [seeFigure IV].
■■ A San Diego household witha median income would
require 35 percent of its
income to pay the mortgage
on a median priced house.
■■ In Dallas-Fort Worth, amedian income household
would pay 15 percent of its
income for the mortgage on
a median priced house.20
After adjusting for differences inincome, the San Diego household
would pay $325,000 more than the
Dallas-Fort Worth household overthe period of the loan (mortgage anddown payment).
The Role of Speculation.
Speculation is often blamed forcontributing to the higher house
prices that developed in the more
highly regulated markets. Research

by Harvard University’s Edward
Glaeser and the University ofPennsylvania’s Joseph Gyourko
indicates that speculative behavior
can be expected in a market withlimited supply.21 Speculators and“flippers” are naturally drawn tomarkets where prices are rising in
anticipation of extraordinary profits.
Speculation was not a significant
factor in the responsively regulated
markets, principally because theprospect of modest price growth does
not yield the short-term profits that
speculators seek.

Other Effects of
Prescriptive Land Use
Regulation
Smart growth leaves bothhouseholds and society less well off.

Urban growth boundaries, which
mandate high-density development
within the boundary and low density
development outside the boundary,are perhaps the most draconianpolicy. They substantially raise land
prices, and thus housing, by severely
restricting where new housing can bebuilt. Urban growth boundaries also
increase traffic congestion and theintensity of local air pollution.22
Further, Raven Saks of theFederal Reserve Board found thatcompact development policies wereassociated with lower employment
growth.23 It is also notable that
metropolitan areas in Texas — thestate with the most liberal land use
regulation in the nation — havegenerally performed better than theirprincipal metropolitan competitors
in Florida and California, whereland use is more restricted.24

Effect on Minority Households.
The loss of housing affordability
disproportionately affects minority
households due to their generally
lower incomes. The white nonHispanic home ownership rate is 50
percent above the rates for Hispanicand African-American households.25
California’s Tomas Rivera Policy
Institute, a Latino researchorganization, raised concerns about
the impact of compact development
on housing affordability, stating:
Whether the Latino
homeownership gap can beclosed, or projected demandfor homeownership in 2020
be met, will depend not only
on the growth of incomes
and availability of mortgage
money, but also on how
decisively California moves todismantle regulatory barriers

The Smart Growth Greenhouse Gas Emissions Dead-End
Proponents have enlisted concerns about greenhouse gas emissions to justify expansion of smart growthpolicies. The first assumption is that densification will reduce driving and thus reduce greenhouse gases. The
second assumption is that higher density residences, such as high-rise apartments, will also reduce greenhousegas emissions. There is a plethora of difficulties with these assumptions. The first problem is that research,even by smart growth advocates, indicates that smart growth policies have little potential to reduce vehicle
travel. The second is that, even if there were some reduction in vehicle travel, increased traffic congestionand slower speeds in denser areas would increase greenhouse gas emissions per mile traveled, perhaps evennullifying any gain. There is far greater potential to reduce greenhouse gas emissions using technologicalstrategies, such as more fuel efficient cars. Moreover, these gains do not require straight-jacketing lifestyles toconform to the latest trends in urban planning.
Finally, it is by no means settled that higher density residences reduce greenhouse gas emissions. Studies
show differing results, and there is no comprehensive U.S. database from which such conclusions can be
drawn. For example, the U.S. Department of Energy’s Residential Energy Consumption Survey does notinclude commonly provided energy in high-rise condominium and apartment buildings for functions suchas lighting, heating, air conditioning, water heating and swimming pool heating. In addition, greenhouse gas
emissions associated with the building of such dwellings (materials and construction activity) are higher per
square foot than for detached housing in suburban locations.15

9

The Housing Crash and Smart Growth

Figure IV

Housing Affordability: 2010
Comparing San Diego and Dallas-Fort Worth$378,000Median House PriceMedian Household Income$150,000$63,000
San Diego$56,400
Dallas-Fort WorthSource: Author’s calculations based on Edward Glaeser and Joseph Gyourko,
Rethinking Federal Housing Policy (Washington, D.C.: American EnterpriseInstitute, 2008), and median house price and median household income for third
quarter 2008. See Demographia, “Sixth Annual Housing Affordability Survey,”
2010. Available at http://www.demographia.com/dhi-ix2005q3.pdf.

that hinder the production ofaffordable housing. Far from
helping, they are making
it particularly difficult for
Latino and African Americanhouseholds to own a home.26
Moreover, rising house prices
also affect rental prices, with a timelag.27 Thus, higher house prices arelikely to lead to higher rental costs
for the approximately one-third ofhouseholds that do not own a home.
This is illustrated by U.S. Departmentof Housing and Urban Development“fair market rents,” which are
estimated at the 40th percentile of therental market (including utilities). For
households in the bottom 25 percentof the income distribution, fair market
10

rent for a two bedroom apartment
in 2008 was 24 percent higher inprescriptively regulated markets thanin responsively regulated markets.28
Effect on Domestic Migration.
Over the past decade, population
has increased faster in responsively
regulated markets than inprescriptively regulated markets.29
The major responsively regulated
markets gained nearly a net 1 million
domestic migrants from 2000 to
2008, while the prescriptively
regulated markets lost a net 2.8
million to domestic migration.30
In responsively regulated Atlanta,
Dallas-Fort Worth and Houston,house prices remained within
historic norms during the housing

bubble. These urban areas are now
are among the fastest growing
in the developed world.31

Conclusion
Housing affordability could be losteven in markets that are responsively
regulated as a result of new state laws
and regulations, but most importantly,
requirements and incentives thatare proposed at the federal level toencourage compact city policies.
There are a number of initiatives that
seek to spread smart growth policies
throughout the nation, including
proposed bills in Congress — suchas surface transportation bills and the“cap and trade” bill, which contains
potentially costly compact citytransportation and housing provisions.
If families are forced to spend moreon housing, they will necessarily
experience a lower standard of living.
Moreover, house price escalation
is likely to resume in prescriptive
markets when the economy returns
to normal, because the excess ofdemand for residential land relative
to supply will remain. California
will be at particular risk of further
affordability losses because of its
greenhouse-gas-related planningrequirements and its already overly
restrictive regulations.32 Eventuallythese initiatives are likely to increase
the cost of housing and decrease
discretionary household incomes.
Prescriptive land use regulations
should be rolled back. This would
increase housing affordability.
House prices have fallen invirtually all prescriptively regulated
markets and could begin rising
inordinately again as housing
demand increases. Metropolitan
areas that are responsively regulated
already enjoy the benefit of lower
cost housing for their citizens.

APPENDIX TABLE A

The Housing Bubble by Land Regulation Category(to the Great Financial Crisis, in 2007 dollars)
Section 1
GROSS VALUE: HOUSING STOCK (Trillions)
Prescriptive

Total

Responsive

Total

Prescriptive:
Concentrated

Prescriptive:
Other

Owned Homes: 2007

28.1%

36.6%

64.8%

35.2%

100.0%

National Value at 2000
Ratio to Income

$2.59

$3.44

$6.03

$2.02

$8.05

Share of National Value

32.2%

42.7%

74.9%

25.1%

100.0%

Value Increase Relative
to Income

$2.89

$1.76

$4.65

$0.56

$5.21

Share of Increase

55.5%

33.8%

89.3%

10.7%

100.0%

Peak Value

$5.48

$5.20

$10.68$2.58$13.26

Loss to Start of Great
Financial Crisis-$1.79-$0.50-$2.28-$0.16-$2.44

Share of Loss

73.2%

20.4%

93.6%

6.4%

100.0%

Total

Responsive

Total

Section 2
AVERAGE HOUSE VALUE: Actual
Prescriptive

Average House Value if No
Inflation from 2000
Value Increase Relative toIncome% Change
Peak House Value
Average House Value atStart of Great Financial
CrisisLoss to Start of Great
Financial Crisis% Change

Prescriptive:
Concentrated

Prescriptive:
Other$254,000$259,000$257,000$158,000$222,000$283,000$133,000$198,000$44,000$144,000

111.4%$537,000

51.4%$392,000

77.0%$455,000

27.8%$202,000

64.9%$366,000$362,000$355,000$358,000$190,000$299,000-$175,000-$37,000-$97,000-$12,000-$67,000-32.6%-9.4%-21.3%-5.9%-18.3%(chart continues on next page)11

The Housing Crash and Smart Growth

APPENDIX TABLE A (continued)

The Housing Bubble by Land Regulation Category(to the Great Financial Crisis, in 2007 dollars)
Section 3
WHAT IF NO SMART GROWTH*
Prescriptive
Prescriptive:
Concentrated

Total

Responsive

Total

Prescriptive:
Other

GROSS VALUE: HOUSING STOCK (Trillions)
Value Increase to Start ofGreat Financial Crisis
Value at Start of Great
Financial Crisis
Loss Peak to Start ofGreat Financial Crisis

$0.72

$0.95

$1.67

$0.56

$2.23

$3.31

$4.39

$7.70

$2.58

$10.28-$0.20-$0.27-$0.47-$0.16-$0.62$254,000$259,000$257,000$158,000$222,000$324,000$305,000$331,000$311,000$328,000$308,000$202,000$190,000$284,000$267,000-$19,000-$20,000-$20,000-$12,000-$17,000

11%

54%

21%

100%

25%

AVERAGE HOUSE VALUE: Actual
Average House Value: If
No Inflation from 2000
Average House Value: 2007
Average House Value: Startof Great Financial Crisis
Loss to Start of Great
Financial Crisis
Intensity of Loss Comparedto Actual*Note: “What if” analysis assumes percentage changes that occurred in responsive land regulation markets.
Source: American Community Survey and National Association of Realtors data, and author’s calculations.

12Endnotes
1.

2.

“Single-Family Square Footage by Location,” National Association of Home Builders. Available at http://www.nahb.com/fileUpload_details.
aspx?contentID=80051.
“Housing Market Statistics,” HousingEconomics.com. Available at http://www.nahb.org/fileUpload_details.aspx?contentID=58231.

3.

Federal Reserve Board, “Flow of Funds Accounts of the United States.” Available at http://www.federalreserve.gov/releases/z1/.

4.

Paul Krugman, “That Hissing Sound,” New York Times, August 8, 2005. Available at http://www.nytimes.com/2005/08/08/opinion/08krugman.
html.

5.

Wendell Cox, “Constraints on Housing Supply: Natural and Regulatory,” Economic Journal Watch, Vol. 8, No. 1, January 2011, pages 13-27.
Available at http://econjwatch.org/articles/constraints-on-housing-supply-natural-and-regulatory.

6.

Calculated from data in Federal Reserve Bank of Dallas, Houston Branch, “Neither Boom nor Bust, How Houston’s Housing Market Differsfrom Nation’s,” Houston Business, January 2008. Available at http://www.dallasfed.org/research/houston/2008/hb0801.pdf.

7.

Edward Glaeser and Joseph Gyourko, The Impact of Zoning on Housing Affordability, Harvard Institute of Economic Research, Discussion
Paper No. 1948, March 2002.

8.

Paul Krugman, “That Hissing Sound.” Also Paul Krugman, “No Bubble Trouble?” New York Times, January 2, 2006. Available at http://select.
nytimes.com/2006/01/02/opinion/02krugman.html. See also Thomas Sowell, “Subprime Pols,” National Review, August 8, 2007. Available at
http://article.nationalreview.com/print/?q=YjgwYzI4Njg3OWMxOGUzYmY0ZDMwYzYwNzkzYjc1NDI; and Theo S. Eicher, “Municipal
and Statewide Land Use Regulations and Housing Prices across 250 Major U.S. Cities,” University of Washington, 2008. Available at http://depts.washington.edu/teclass/landuse/housing_020408.pdf.

9.

Jonathan Martin, Robert Puentes and Rolf Pendall, “From Traditional to Reformed: A Review of the Land Use Regulations in the Nation’s
50 Largest Metropolitan Areas,” Brookings Institution, August 2006. Available at http://www.brookings.edu/reports/2006/08metropolitanpoli
cy_pendall.aspx.

10.

For critiques of smart growth policy see Robert Bruegmann, Sprawl: A Compact History (Chicago: University of Chicago Press, 2005);
William T. Bogart, Don’t Call It Sprawl: Metropolitan Structure in the 21st Century (Cambridge, U.K.: Cambridge University Press
2006); Randal O’Toole, The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your
Future (Washington, D.C.: Cato Institute 2007); Wendell Cox, War on the Dream: How Anti-Sprawl Policy Threatens the Quality of Life
(Bloomington, Ind.: iUniverse Publishing, 2006).

11.

Transportation Research Board, “Costs of Sprawl, 2010,” Table 15.4, September 8, 2009. Available at http://onlinepubs.trb.org/onlinepubs/tcrp/
tcrp_rpt_74-c.pdf.

12.

Demographia, “Demographia Residential Land Regulation Cost Index: 2010.” Available at http://www.demographia.com/dri-full.pdf.

13.

Fischel found no effect from alternative causes, such as differences in construction cost increases, population growth, quality of life, amenities,
adoption of Prop 13 (the state’s property tax reform initiative), land supply or water issues. See William Fischel, Regulatory Takings, Law,
Economics and Politics (Cambridge, Mass.: Harvard University Press, 1995), pages 218-252.

14.

Wendell Cox, “Smart Growth and Housing Affordability,” Millennial Housing Commission, 2002. Available at http://govinfo.library.unt.edu/
mhc/papers/coxsg.doc.

15.

Wendell Cox, “Reducing Greenhouse Gas Emissions from Personal Mobility,” Reason Foundation (forthcoming).

16.

Federal Reserve Board, “Flow of Funds Accounts of the United States.” Available at http://www.federalreserve.gov/releases/z1/.

17.

Wendell Cox, “The Fed and Asset Bubbles: Beyond Superficiality,” NewGeography, December 5, 2009. Available at http://www.
newgeography.com/content/001249-the-fed-and-asset-bubbles-beyond-superficiality. Las Vegas and Phoenix have been wrongly characterized
as having responsive land use regulation. In fact both metropolitan areas are prescriptively regulated and, in addition, are surrounded bygovernment-owned land that forms virtual urban growth boundaries. See Demographia, “Las Vegas Land Market Analysis,” 2010. Available
at http://www.demographia.com/db-lvland.pdf. And Demographia, “Phoenix Land Market Analysis,” 2010. Available at http://www.
demographia.com/db-phxland.pdf.

18.

Inflation adjusted increase in value to 2007 in comparison to the value for the same stock without inflation from 2000.

19.

Demographia, “The Housing Downturn in the United States: 2009 First Quarter Update,” 2009. Available at http://demographia.com/dbushsg2009q1.pdf.
13

The Housing Crash and Smart Growth

14

20.

Assumes a 10 percent down payment and a 30-year, fixed rate mortgage at 5 percent. Author’s calculations based on Edward Glaeser andJoseph Gyourko, Rethinking Federal Housing Policy (Washington, D.C.: American Enterprise Institute, 2008), and median house price andmedian household income for third quarter 2008. See Demographia, “Sixth Annual Housing Affordability Survey,” 2010. Available at http://
www.demographia.com/dhi-ix2005q3.pdf.

21.

Edward Glaeser and Joseph Gyourko, Rethinking Federal Housing Policy (Washington, D.C.: American Enterprise Institute, 2008).

22.

Wendell Cox, “How Densification Will Intensify Traffic Congestion, Air Pollution and the Housing Affordability Crisis,” Apartment
Association of Metro Denver Economic Conference, January 23, 2001. Available at http://www.demographia.com/db-denapt010123.htm.

23.

R.E. Saks, “Job Creation and Housing Construction: Constraints on Metropolitan Area Employment Growth,” September 22, 2005. Available
at http://www.federalreserve.gov/pubs/feds/2005/200549/200549pap.pdf.

24.

Wendell Cox, “How Texas Averted the Great Recession,” Houstonians for Responsible Growth, 2009. Available at http://www.houstongrowth.
org/node/63.

25.

Calculated from U.S. Bureau of the Census data.

26.

Waldo Lopez-Aqueres, Joelle Skaga and Tadeusz Kugler, Housing California’s Latino Population in the 21st Century: The Challenge Ahead(Los Angeles, Calif.: The Tomas Rivera Policy Institute, 2002). Available at http://www.trpi.org/PDFs/housing_ca_latinos.pdf. “Growth
controls” are compact development policies.

27.

See, for example, Morris A. Davis, Andreas Lehnert and Robert F. Martin, “The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied
Housing,” Department of Real Estate and Urban Land Economics, University of Wisconsin-Madison and the Federal Reserve Board ofGovernors, 2007. Available at http://morris.marginalq.com/dlm_data_files/2007-12.DLM_fullpaper.pdf.

28.

Demographia, “Low Income Rental Affordability: HUD Fair Market Rent/Low Quartile (25 percent) Household Income: 2008: Metropolitan
Areas over 1,000,000,” August 20, 2010. Available at http://demographia.com/db-fmr-mult.pdf.

29.

Demographia, “Net Domestic Migration by Land Use Category: 2000-2008: Metropolitan Areas Over 1,000,000 Population,” 2009. Available
at http://demographia.com/db-2008mighaffcat.pdf.

30.

People who move from one county to another within the United States.

31.

Texas experienced a real estate “bust” (including residential) in the 1980s. However, there was no “bubble.” House prices had been near or
below a median multiple of 3.0 and fell from that point. Excessive lending (which ended in the savings and loan crisis) and a precipitous
decline in oil prices contributed to the problem. The excessive lending failed to drive house prices up, because land use regulations allowed
a sufficient supply response. As a Texas A&M University Real Estate Center publication indicated, “The Texas residential market’s ability to
produce new housing units at a rate commensurate with demand and without escalating costs is a prime factor in balancing the market andkeeping price changes modest.” See James P. Gaines, “Texas Housing Bubble: Truth or Scare?” April 2006. Available at http://recenter.tamu.
edu/pdf/1769.pdf.

32.

California Senate Bill 375 implements programs to reduce greenhouse gas emissions through land use planning. As the research cited
above indicates, land use planning is a particularly ineffective means for reducing greenhouse gas emissions. Administration of California
environmental legislation, such as Assembly Bill 32 (the “Global Warming Solutions Act”), has been skewed toward smart growth approacheswith little critical analysis. The result is likely to be a failure to achieve the emissions reduction objectives, while substantially increasing thecost of living and making traffic congestion even more severe.

About the NCPA

The NCPA is a nonprofit, nonpartisan organization established in
1983. Its aim is to examine public policies in areas that have asignificant impact on the lives of all Americans — retirement, healthcare, education, taxes, the economy, the environment — and to
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The NCPA is probably best known fordeveloping the concept of Health Savings
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15

About the NCPA

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